Ameis Regulatory Services
The International Organization of Securities Commission (IOSCO) Report aims at outlining some of the risks to which interested investors might be exposed due to the greenness of the industry and the assets themselves. Based on surveys conducted by the IOSCO Committee on Retail Investors among C8 members, the results highlight that educating retail investors about crypto-assets is a high priority.
The Report spans the various types of crypto-assets as well as their related risks and provides a list of guidance to assist regulators and investors in addressing these risks.
Although the Report outlined that there is ‘no globally accepted taxonomy of crypto-assets in use by international standard-setting bodies’, it provides the generally accepted categorisation of DLT/blockchain-based crypto-assets namely:
Security Tokens, ‘which provide rights (e.g. in the form of ownership rights and/or entitlements similar to dividends). Example: Bitbond.’
Utility Tokens, which 'enable access to a specific product or service often provided using a DLT platform. Utility Tokens can only be used in the issuer’s network. Example: Ether.’
Payment/Exchange/Currency Tokens, referred to as virtual currencies (VCs) or crypto-currencies & Stablecoins.
VCs typically do not provide rights but are used as a means of exchange (e.g. to enable the buying or selling of a good provided by someone other than the issuer of the token), for speculative purposes or for the storage of value. Example: Bitcoin or Ether.’
Stablecoins, a relatively new form of payment/exchange token that is typically asset-backed (by physical collateral or crypto-assets) or is in the form of an algorithmic stablecoin.'
The main risks related to these instruments outlined in the report include:
Volatility risk, the lack of a ‘real’ underlying asset renders the valuation and pricing of crypto-assets challenging.
Counterparty risk, including risk arising from crypto-assets brokers, crypto trading platforms and wallet providers.
Partial or total loss of the invested amount, as the capital invested is not guaranteed.
Insufficient information disclosure.
Lack of regulation, in which investors do not benefit from civil consumer protection law among others.
To address these risks and educate investors, IOSCO is recommending some practical guidance to regulators on the following four areas:
Developing educational materials and warnings to explain the characteristics and risks of crypto-assets;
Informing the public about unlicensed or fraudulent firms;
Using a variety of communication channels to inform investors; and
Forging partnerships to develop and disseminate educational materials.
To view the report, go to https://www.iosco.org/library/pubdocs/pdf/IOSCOPD668.pdf